5 Ways To Improve Your Finances Before The End of The Year

With only a few weeks left in 2010, it’s a time not only of reflection on the past year’s accomplishments, but also a time to prepare your finances for the upcoming year. Here are a few things you can do to make 2010 a more profitable year, and put you on the right
financial track for 2011.

1. Convert Your IRA to a Roth
For anyone planning to convert their traditional IRA(s) to a Roth IRA, executing the conversion in 2010 may be advantageous. The Tax Increase Prevention and Reconciliation Act of 2005 allows anyone, regardless of income, to convert a traditional IRA to a Roth IRA as long as they pay the tax on the converted amount.  What’s special about 2010 is that the tax liability from conversions made this year can be spread over two years, which can be very beneficial if your IRA is large enough to push you up to a higher tax bracket.

2. Harvest Your Losses
Tax loss harvesting is the act of intentionally selling an asset at a loss to offset current and/or future capital gains. It is one of the few methods individuals can employ to manage their Adjusted Gross Income (AGI) and hence, reduce their taxes. To reduce their tax liability, many people rely solely on taking itemized deductions, such as mortgage-interest and charitable contributions. While itemized deductions can bring you modest tax benefits, they have no impact on one’s AGI. As the adage says, Don’t Lose the Forest For the Trees. In other words, be aware that there is a bigger tax benefit in tax loss harvesting and put it to work for you. It is important to note that tax loss harvesting only applies in your taxable accounts, not in your IRAs or 401ks.  Each person’s tax situation is different, so investors should consult with their financial and tax advisors before engaging in such strategies.

3. Maximize Your Retirement Contributions
The easiest way to reduce your tax liability immediately is to have less taxable income. Employer sponsored retirement plans are one of the best ways to accomplish this, because any contribution made to such plans reduces your taxable income.  Whether you are self-employed or are an employee, the IRS has limitations on how much you can contribute to your retirement accounts each year. If you are an employee, the total amount you can put into your 401k in 2010 is $16,500. So for example: if you make  $100,000 a year in salary, and contribute $16,500 into your 401k plan, you are then taxed on only $83,500. If you’re in the 28 percent tax bracket, that’s an immediate tax savings of $4,620! Check your year-to-date 401k contribution, and if you haven’t yet met the annual IRS limit, increase your contribution for the month of December.

4. Check Your Credit
With every online mouse click, query, and purchase, we increase our risk of identify theft. And since credit checks are prerequisites for just about anything you do, it is imperative that you make sure your credit report is accurate and favorable. Under current laws, you are entitled to a free copy of your credit report each year. Don’t be fooled by those catchy commercials directing you to order your “free” credit report with their company; there is only one government authorized website to order your truly free report — www.annualcreditreport.com. According to the Federal Trade Commission, other websites that claim to offer “free credit reports,” “free credit scores,” or “free credit monitoring” are not part of the legally mandated free annual credit report program. Once you have looked over your credit report, if you feel there is a mistake, there are steps you can take to correct it.

5. Meet With an Estate Attorney
Even in 1789, Benjamin Franklin knew that “nothing is certain but death and taxes.”  While many people strive to reduce their living-years taxes, fewer recognize that tax planning extends beyond the living years. A well designed estate plan will not only
help reduce your taxes during your lifetime, but also reduce taxes paid on your assets after you pass. More importantly, it will help ease potentially difficult decisions your heirs would have had to make such as: Who will look after your minor children? Who can act on your behalf if you become incapacitated? Who will inherit your assets when you pass? – Most people are quick to dismiss the need for a comprehensive estate plan because they believe an “estate” is that of the ultra-rich with mansions, expensive cars, and other large assets. However, simply stated, your estate is comprised of all the things you own, including your bank accounts, car(s), furniture, lawnmower, books, musical instruments, and even your pots and pans! Don’t you want a say in what happens to your estate once you pass? If so, then it’s important to schedule an appointment to speak with a qualified estate attorney who can draft an
estate plan for your unique goals and circumstances.

About the author

Ara Oghoorian, CFA, CFP®

Ara Oghoorian, CFA, CFP® is the founder and president of ACap Asset Management, Inc, a financial advisory specializing in working with medical professionals. Ara has over 20 years of experience in the financial services industry. Prior to starting ACap, Ara worked for a wealth management firm in the Washington, DC area providing investment management, tax preparation/planning, financial planning, complex risk-management strategies, and financial advice to ultra high net worth individuals and institutional clients.

Ara worked overseas for the US Department of the Treasury as an advisor to the Ministry of Finance and Economy in the Republic of Armenia. He also conducted work in the Republic of Georgia and the Republic of Latvia. He spent nine years at the Federal Reserve Bank of San Francisco auditing foreign and domestic banks and bank holding companies. He began his career at Wells Fargo Bank in Huntington Beach, CA.

Ara earned a Bachelor of Science degree in finance from San Francisco State University, is a Commissioned Bank Examiner through the Federal Reserve Board of Governors, and holds the Chartered Financial Analyst (CFA) designation. Ara also holds the Series 65 license.

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